With a market capitalization of $3.6 billion, Descartes Systems Group Inc. (TSE: DSG) has emerged as one of Canada’s fastest-growing technology companies. But despite recording 200% growth over five years, DSG stock still hasn’t reached full potential. New York-based Echelon Wealth Partners recently upped its price target for the stock to $55, some 20% higher than current levels.
- Company: Descartes Systems Group Inc.
- Ticker: DSG (TSE), DSGX (Nasdaq)
- Market Cap: $3.6 billion
- Annual Revenue Growth: 16% (Jan. 2019)
- Free Cash Flow: $67 million (2018)
Descartes by the Numbers
Based in Waterloo, Ontario, Descartes Systems Group is a multinational technology company specializing in logistics and supply-chain management software. The company is nearly 40 years old but has managed to reinvent itself by pivoting toward cloud computing, a disruptive technology that has changed the infrastructure landscape over the past decade.
Descartes’ rapid growth can be summed up in a few key statistics. The company has managed to grow its revenues in each of the past nine years, culminating in a $275.2 million haul for fiscal 2018. That represents a cumulative gain of 316% since 2009. Sales totalled $71 million in the most recent quarter for a gain of 12% year-over-year. Its adjusted EBITDA was $25 million, up 17% annually. The management team behind Descartes continues to target adjusted EBITDA growth of 10-15% annually.
Investors have caught on to Descartes’ trajectory. Over half a decade, the company’s share price has grown by about 200%, or 24% per quarter. Over the same stretch, per-share earnings climbed 11% annually. Clearly, investors hold DSG in high regard.
As a provider of global logistics technology solutions, Descartes is capitalizing on the ‘bricks-to-clicks’ paradigm shift currently underway in its core markets. ‘Bricks-to-clicks’ is a term that describes the ongoing shift from traditional brick-and-mortar business to e-commerce, telephone ordering, and mobile apps. Descartes happens to be laser-focused on all these domains.
According to the official website, Descartes is focused on six major sectors: transportation/logistics, distribution, manufacturing, retail, business services, and the public sector. These sectors are not only experiencing digital transformation by way of ‘bricks-to-clicks,’ but are beginning to see the utility of cloud computing through the massive amounts of data associated with logistics transactions. That’s why Descartes is focused on transitioning existing clients to its service-based architecture. On March 25, Descartes announced it was sticking with Microsoft Azure to power its cloud solutions.
Some of Descartes’ biggest clients include Dow industrials Coca-Cola Co (NYSE: KO) and The Home Depot (NYSE: HD), as well as American Airlines (NASDAQ: AAL). The increasing focus on cloud computing means the company seems to capitalize on higher-margin revenue that can fuel continued expansion in the future.
Canada’s technology landscape offers no guarantees of success, but Descartes has carved out a proven track record of sustainable growth. The transition to higher-margin service revenue should keep the company on even keel in fiscal 2020. Given how the stock has performed lately, the price target identified by Echelon seems more than reasonable.
Disclosure: Author has no investment stake in Descartes Systems Group.